Corporations Amendment (Sons of Gwalia) Bill 2010

Bills Digest no. 182 2009–10

Corporations Amendment (Sons of Gwalia) Bill
2010

WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.

The main purpose
of the Bill is to amend the Corporations Act 2001 (the
Corporations Act) to reverse the effects of the decision of the
High Court of Australia in Sons of Gwalia Ltd v Margaretic
[2007] HCA 1; (2007) 231 CLR 160; (2007) 232 ALR 232; (2007) 81
ALJR 525 (Sons of Gwalia).[2]

In Sons of Gwalia, the High Court determined that
section 563A of the Corporations Act, as currently worded, did
not subordinate certain compensation claims by shareholders
below the claims of other creditors in the external administration
of a company. More particularly, it determined that
shareholders who had suffered loss or damage as a result of
purchasing shares in a company on the basis of false or misleading
information contained in the company’s financial statements
should rank equally with unsecured creditors in the distribution of
the company’s assets in a winding-up. In so deciding,
the High Court affirmed the decision of the House of Lords in
Houldsworth v City of Glasgow Bank (1880) 5 AC 317, which
established that a person’s capacity to bring a claim for
damages can be affected by how the person acquired the shares and
whether the person still holds them.

While the Australian Securities and Investments Commission
(ASIC) (among others) supported the High Court’s decision,
the banking industry and ‘many insolvency
practitioners’ opposed the outcome.[3]

On 19 January 2010, Chris Bowen MP (Minister for Financial
Services, Superannuation and Corporate Law) announced a package of
reforms to Australia’s corporate insolvency laws.[4] According to the
Minister’s media release, the package contains ‘a range
of reforms directed at reducing the costs and complexity of
insolvency administrations; improving communications with creditors
(such as through the use of e-mail); and reducing the potential for
abuse of corporate insolvency law’.[5] The reforms
‘substantially’ adopt the recommendations made in
December 2008 by the Corporations and Markets Advisory Committee
(CAMAC) following its review of shareholder claims against
insolvent companies in the wake of the High Court’s
decision.[6]

As part of the package of insolvent trading reforms, the
Minister released a discussion paper setting out possible options
for providing a safe harbour for reorganisation attempts outside of
external administration (commonly known as ‘informal
workouts’). Submissions closed on 2 March 2010.
Treasury received 22 submissions (of which all 22 were made
public),[7] and the
Government is now working on an exposure draft of a Bill containing
proposed amendments of the Corporations Act.[8]

Also on 19 January 2010, the Minister announced that the
Government proposed to introduce legislation designed to reverse
the effects of the decision of the High Court in Sons of
Gwalia.[9]
In so doing, the Rudd Government signalled its rejection of
CAMAC’s recommendation to allow the effect of the decision to
stand—although it is noted that the recommendation was not
supported by all members of CAMAC’s Advisory
Committee.[10] The issue is a vexed one, as CAMAC noted in its
report:

This is an area where certainty is
required. The decision of the High Court—while it may
have surprised some and given rise to legitimate concerns—has
provided a useful measure of certainty about the legal
position. While recognising a tension in underlying policy
considerations, the Court held as a matter of statutory
construction that claims by aggrieved shareholders for damages were
not claims ‘in their capacity as a member’ that should
be postponed. It follows that they should be treated on a par
with the claims of ordinary unsecured creditors. Shareholders
and those who extend credit to companies now know the position that
will apply in the event of aggrieved shareholder claims in an
external administration.

The question is whether the legal position as
laid out by the High Court is appropriate as a matter of policy or
whether it has adverse consequences that call for legislative
intervention. The views of interested parties on this policy
question are polarised. Strong arguments have been put
forward for maintaining the current position on the one hand or
postponing or limiting the claims of aggrieved shareholders in an
external administration on the other.[11]

Under proposed section 563A (as repealed and
substituted by item 2 of Schedule
1 to the Bill), any claim brought by a person (and not
just a shareholder) against a company that arose from the buying,
selling, holding or otherwise dealing with a shareholding is to be
postponed in an external administration until after all other
claims have been paid. One academic commentator
suggests that the proposed reform (which really just reinstates the
commonly held view about the meaning of section 563A before the
High Court’s decision) ‘will create a rich and warm
feeling with business’.[12] Particularly, this is because the reversal
of the effect of the High Court’s decision is thought to end
long-standing uncertainty over the relative rights of creditors and
shareholders, thus encouraging lenders to offer finance to
companies by once more giving priority to debt over equity in the
winding-up of a company.[13]

On 13 May 2010, the Senate resolved to refer the provisions of
‘time-critical Bills’ to various legislative and
general purpose standing committees for inquiry and report by
15 June 2010.[14] On 3 June 2010, the
Senate Economics Legislation Committee reported that there are no
substantive matters that require examination in the current
Bill.[15]

Item 1 of Schedule
1 inserts proposed Part 2F.4 into the
Corporations Act, which deals with proceedings against a company by
members and others. It currently comprises only one
provision: proposed section 247E, which states
that a person is not prevented from obtaining damages or other
compensation from a company simply because the person:

holds, or has held shares in the company

has subscribed for shares in the company, or

has a right to be included in the register that the company
maintains under section 169 of the Corporations Act.[17]

The provision abrogates (or cancels) the
effect of the decision of the House of Lords in Houldsworth v
City of Glasgow Bank (see above). As a result, there
will be no restriction on a shareholder’s ability to recover
damages against a company based on how he or she acquired the
shares or whether he or she still holds them.

Item 2 repeals existing
section 563A and substitutes proposed section 563A
in its place. It provides that the payment of a subordinate
claim made against a company is to be postponed until all other
claims against the company are satisfied. The term
‘subordinate claim’ is defined in
proposed subsection 563A(2) to mean:

(a) a claim for a debt
owed by the company to a person in the person’s capacity as a
member of the company (whether by way of dividends, profits or
otherwise); or

(b) any other claim that
arises from a person buying, holding, selling or otherwise dealing
in shares in the company.

Proposed section 563A (as
repealed and substituted by item 2) applies to any
claim that arises after Schedule 1 commences (being the day after
Royal Assent).[18]

Item 3 inserts
proposed section 600H into the Corporations Act,
which sets out the rights of a person whose claim against a company
is postponed under section 563A.

Under proposed paragraph
600H(a), the person is entitled to receive a copy of any
notice, report or statement to creditors, but only if the person
asks the company’s administrator or liquidator, in writing,
for a copy of the document.

Under proposed paragraph
600H(b), the person is entitled to vote in his or her
capacity as a creditor of the company during the external
administration of the company, but only if the Court so
orders. The Explanatory Memorandum suggests that in
determining whether to make such an order, the Court ‘might
be expected to have regard to whether the person might reasonably
be considered to possess a real financial interest in the external
administration’.[19] However, the Bill contains no indication of the
sorts of matters to which the Court must, or may, have regard in
determining whether to make the order.

Proposed section 600H
applies to any claim made against a company if the external
administration of the company commences after Schedule
1 to the Bill commences (being the day after Royal
Assent).[20]

Members, Senators and Parliamentary staff can obtain further
information from the Parliamentary Library on (02) 6277 2795.

[1]. Clause
2 of the Bill. Note, however, that the Explanatory
Memorandum claims that the Bill commences on a single day
‘fixed by proclamation’. See Explanatory
Memorandum, Corporations Amendment (Sons of Gwalia) Bill 2010, pp.
3 and 8.

[6]. CAMAC was
established in 1989 ‘to provide a source of independent
advice to the Australian Government on issues that arise in
corporations and financial markets law and practice’.
See CAMAC, Welcome to CAMAC, CAMAC website, viewed 10 June
2010, http://www.camac.gov.au/camac/camac.nsf

[14]. Senator P Wong,
‘References to committees’, Senate, Debates,
13 May 2010, p. 2839, viewed 10 June 2010, http://www.aph.gov.au/hansard/senate/dailys/ds130510.pdf.
Here the phrase ‘time-critical Bills’ refers
to all Bills introduced into the House of Representatives after
13 May 2010 and before 3 June 2010 that contain provisions
commencing on or before 1 July 2010.